H&R Block, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended October 31, 2019; unaudited. Unless noted, financial amounts below are in millions of U.S. dollars. H&R Block provides assisted, DIY and virtual tax-preparation services, along with small-business financial solutions. Results are highly seasonal, with peak revenue typically in February through April; interim losses are not indicative of full-year results.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2019 | Six months ended Oct. 31, 2019 | Prior-year comparable |
|---|---|---|---|
| Revenue | $160.8 (+8.0%) | $311.2 (+5.8%) | $148.9 and $294.1 |
| Net loss | $(188.0) | $(338.2) | $(176.3) and $(328.9) |
| Loss per diluted share | $(0.95) | $(1.69) | $(0.86) and $(1.59) |
| EBITDA from continuing operations, non-GAAP | $(197.3) | $(344.8) | $(169.3) and $(306.4) |
EBITDA margin, calculated as EBITDA from continuing operations divided by revenue, was approximately -122.7% for the quarter and -110.8% for the six-month period, versus -113.7% and -104.2%, respectively, a year earlier. The filing does not present a conventional profit margin measure; these off-season results should be viewed in light of the company’s seasonality.
- Revenue mix and costs: Six-month U.S. DIY tax-preparation revenue rose 37.7% to $8.0, primarily on higher off-season online volumes. Wave contributed $14.5 of six-month revenue. Total operating expenses increased 8.3% to $749.1, outpacing revenue growth.
- Cash flow: Six-month operating cash used was $693.3, compared with $627.7 used in the prior year. Investing cash used was $417.1, including the Wave acquisition; financing cash used was $176.8. Cash, cash equivalents and restricted cash declined $1,286.1 to $421.6, including unrestricted cash of $245.3.
- Debt and liquidity: Debt and line-of-credit borrowings totaled $1,629.0, including $648.7 classified as current because $650.0 of senior notes mature in October 2020. The company had drawn $135.0 on its $2.0 billion revolving credit facility; covenant-limited additional availability was approximately $962.0. It reported compliance with the facility covenants. Current assets of $601.4 were below current liabilities of $1,264.0. Stockholders’ equity was negative $75.7.
- Other obligations and capital returns: Operating lease liabilities totaled $489.6 after adoption of the new lease standard. Six-month dividends paid were $104.1 and share repurchases, including shares surrendered, were $190.4. The declared dividend was $0.26 per share for the quarter.
Changes versus prior year and notable items
- Quarterly revenue rose 8.0%, but net loss widened 6.7%; for six months, revenue rose 5.8% while net loss widened 2.8%. Continuing-operations loss per share increased to $0.93 for the quarter and $1.65 for six months, from $0.83 and $1.55.
- Operating expense growth reflected higher wages and benefits, technology consulting, and legal fees. Six-month legal fees and settlements increased $12.8 to $16.3; credit-card and bank charges increased $8.7, partly associated with Wave. Occupancy expense declined, partly because of prior-year office-closure costs.
- H&R Block acquired Wave on June 28, 2019, for total consideration of $408.4, funded with available cash. Wave recorded $14.5 of revenue and a $21.3 pretax loss from acquisition through October 31. The company said the acquisition enhances its position in the small-business market; purchase-price allocation and tax impacts were not fully finalized.
- The company adopted the new lease accounting standard on May 1, 2019, recognizing lease right-of-use assets and liabilities. Management said adoption did not materially affect the income statement or cash flows.
Outlook, risks and contingencies
- No quantified full-year earnings or revenue guidance is provided in the supplied filing text. Management said that, absent unexpected developments, existing capital sources were sufficient for operating, investing and financing needs, and that it was considering financing options for the October 2020 note maturity. Refinancing availability and terms are not assured.
- Management expects the six-month pretax loss to be offset by fourth-quarter income in line with the seasonal pattern of the tax-preparation business. It recorded a six-month income-tax benefit of $139.1, including a $25.2 discrete benefit, and noted that interim effective tax rates may differ substantially from the full-year rate.
- Free File-related lawsuits and governmental inquiries are ongoing. The company had not concluded that losses were probable and had not accrued liabilities for the described Free File matters. It also faces legacy claims tied to its discontinued mortgage operations; outcomes and potential losses may be difficult to estimate. The company reported that its estimable aggregate range of reasonably possible losses in excess of accruals was not material, while warning that unfavorable outcomes could be material.
- The company stated that there were no material changes in risk factors or market risks from its prior annual report. Management concluded disclosure controls were effective; implementation of a company-wide general ledger system changed internal controls, with no other material control changes reported.
Key facts for investors to verify
- Progress and terms of refinancing or repayment for the $650.0 million senior notes due October 2020, and continued compliance with revolving-credit covenants.
- Seasonal fourth-quarter results and cash generation relative to management’s expectation that peak-season income offsets off-season losses.
- Wave’s subsequent revenue, profitability, integration costs, and completion of purchase-price and tax accounting.
- Developments in Free File litigation and legacy mortgage claims, including any change in accruals or estimated exposure.
- Cash use, working-capital needs, dividends and repurchases, given the off-season cash decline and current-liability position.